Financial Development and the Renewable Energy Transition in South Africa: Uncovering the Causal Dynamics

Abstract

This study examines the causal relationship between financial development and renewable energy consumption in South Africa using annual data from 1990-2024. The analysis employs a Vector Error Correction Model (VECM)  Granger causality framework to distinguish between short-run dynamics and long-run equilibrium relationships. Unit root tests confirm that the variables are integrated of order one, while the Johansen cointegration test indicates the existence of a long-run relationship among renewable energy consumption, financial development, economic growth, inflation, and capital formation. The VECM Granger-causality results reveal strong long-run unidirectional causality running from financial development, economic growth, inflation, and capital formation to renewable energy consumption. In the short run, credit extension and economic growth are found to Granger-cause renewable energy consumption. The findings highlight the importance of financial sector development in facilitating renewable energy expansion. Strengthening financial systems may therefore support South Africa’s transition toward a more sustainable energy system.